United States stock markets recovered strongly from March lows and shrugged pandemic fears to end 2020 with significant gains. While Dow Jones gained 67% between the end of March and December, S&P 500 jumped 70% in the same time period, and NASDAQ zoomed a massive 90%. After this stellar performance, global investment bank JP Morgan has now turned ‘Neutral’ on US Equities for the first time in three years. In a recent report, the global brokerage firm said that it was ‘Overweight’ on US equities post the 2017 reflation trade. It held that view throughout 2018, 2019 and 2020, but not anymore.
Policy support gone
Analysts at JP Morgan believe US equities were benefiting from an exceptional US Federal Reserve backstop and more growth heavy inclination. The policy support lent by the Fed now seems to be peaking. “We took profits on the trade given a very strong run, and a likely stalling in Tech leadership ahead,” JP Morgan said.
The S&P 500 has now swelled over five times since its 2009 lows. This massive surge has now pushed the index to a point where it appears stretched on most valuation metrics, according to the report. “S&P 500 cycle-adjusted P/E is currently over 90% above the long-term average. Historically, from these P/E levels, real capital returns have tended to be unappealing over the next ten years,” JP Morgan analysts said.
The leadership of US equities over others in the region has been consistent with growth outperforming value, and tech stocks outperforming banks, which may no longer be the case. The report added that strong earnings of US firms supported the outperformance of equities over the past couple of years. “Strong US earnings delivery supported its outperformance, and we still expect robust US EPS growth this year. However, the growth differential between the US and RoW may start narrowing,” JP Morgan said.
Joe Biden to hurt Wall Street?
Going ahead, under incoming President Joe Biden’s administration in 2021, the relative performance of the US could be hurt. “We do not believe that US politics will hurt US stocks in absolute terms, as it is unlikely that Biden will be able to deliver on some potentially market-unfriendly proposals. In relative terms though, investor sentiment might be impeded as there is a headline newsflow risk with respect to some of these policies,” JP Morgan said.